IRS Grants Relief on Unnecessary 2009 Retirement Plan Distributions
For 2009 only, retirees and others who are required to take a minimum required distribution (MRD) from an investment retirement account (IRA) or qualified retirement plan received special relief from Congress.
This year they do not have to take the usual taxable distribution from their plans and can reverse existing payments, but they only have until November 30, 2009 to annul any unwanted taxable income.
“Some financial institutions and retirees missed this rule and erroneously drew income from a retirement plan during 2009 that was not necessary,” says Nick Houle, a principal with LarsonAllen Financial, LLC.
Sponsors of retirement plans will need to amend their plans in order to comply with the temporary waiver. That deadline is January 1, 2011.
This relief applies to those who took a 2009 payout, whether intentionally or through administrative error. If you or other family members would benefit from restructuring these payouts, this new grace period could be helpful.
Why the extension was granted
In December 2008, Congress recognized that many retirees would be forced to take their annual MRD during depressed market conditions. Accordingly, legislation was enacted to waive the requirement for those age 70 ½ and older. It also impacted beneficiaries of a decedent’s retirement plan, who were either subject to a lifetime MRD payout or were awaiting the five-year post-death deadline for receiving the entire distribution from the decedent’s plan.
According to the IRS, a number of these individuals received inadvertent distributions, perhaps by computerized programs at financial institutions that were not altered immediately after the law change. Also, some may have been confused and erroneously requested a distribution that was unnecessary.
Initially, the only IRS relief pronouncement was to rollover the erroneous distribution into the retirement plan or other IRA within 60 days of the distribution. But now any taxable 2009 MRD may be reinvested back into an IRA or retirement plan by November 30, 2009.
Applying the extension to qualified plans and IRAs
For a qualified retirement plan payout, the rollover is permitted if the payments equal the 2009 MRD amount. It is also permitted if the payments are part of a series of substantially equal distributions that includes the 2009 MRD, and are being paid over a life expectancy computation or for a period of at least 10 years.
For IRA owners, distributions may be rolled over by November 30, 2009, but a rule limits a rollover to no more than one distribution from an IRA per year. Accordingly, someone who received multiple distributions from his or her IRA, even as MRD payouts, may only select one of those distributions for rollover.
Who will benefit
Most retirees will benefit from not having the extra taxable income in 2009. “It’s not only about avoiding the taxable income from the MRD, there is also increased taxability of Social Security and other phase-ins that cause greater taxation,” states Houle. Generally, avoiding the MRD is favorable, notes Houle, and the extension allows those who received a payout to reconsider that decision. Middle and upper-income filers particularly will benefit from taking advantage of the waiver.
Who might not benefit
Some lower income retirees will still want to draw a 2009 taxable retirement plan payout. For those who have a modest taxable income or deductions that wash out their income, the MRD can help assure their deductions are not wasted. Particularly, retirees who had significant medical costs or other substantial tax deductions should assess whether taking an MRD will help utilize their tax return deductions and exemptions. Generally, these deductions and exemptions are wasted if there is inadequate income, notes Houle.
What plan sponsors need to do to comply
The transitional relief will require sponsors of defined contribution plans (e.g., 401(k), 403(b), 457(b)) and IRAs, to amend their plan in order to comply with the temporary waiver. That deadline is no later than the first day of the first plan year beginning on or after January 1, 2011. The IRS has issued two sample amendments in
IRS Notice 2009-82 that plan sponsors may use if applicable.
We can assist in providing advice on whether an MRD payment should be accepted or avoided, and how to accomplish a rollover if that is the better action. Please contact a LarsonAllen tax principal in your region to discuss what may be best for you or your family members.